Financial Planning and Investing Glossary
Financial terminology can feel complicated. This glossary provides straightforward explanations of common investing, retirement, insurance and federal-benefit terms. These definitions are provided for general educational purposes and are not individualized financial, investment, tax or legal advice.
ABC Planning Process
The ABC Planning Process is a framework FMS Financial Services uses to organize financial choices by their potential for growth, access to money and degree of protection. It is intended to make the trade-offs among these priorities easier to understand and discuss.
Annuity
An annuity is a contract with an insurance company that may be used to accumulate money, create an income stream or provide certain contractual benefits. Features, costs, risks, withdrawal restrictions and guarantees vary by contract and insurer.
A
Asset Allocation
Asset allocation is the way money is divided among investment categories—such as stocks, bonds and cash—based on an investor’s goals, time horizon and comfort with risk.
Beneficiary
A beneficiary is a person, trust, charity or other entity designated to receive assets or benefits after someone’s death. Beneficiary designations can apply to retirement accounts, insurance policies, annuities and other financial accounts.
Bond
A bond is a debt investment through which an investor lends money to a government, municipality or company. In return, the issuer generally promises interest payments and repayment of the bond’s principal, subject to the issuer’s ability to pay.
B
Cash and Liquidity (A)
The Cash and Liquidity category of the ABC Planning Process includes financial options that generally prioritize access to money and relative stability. These options may offer lower growth potential, and their liquidity, insurance coverage, restrictions and risks vary by product.
Civil Service Retirement System
The Civil Service Retirement System, or CSRS, is a federal retirement system covering many eligible civilian employees who entered federal service before 1984. It generally provides a pension benefit based on an employee’s service and high-3 average salary.
Cash Value
Cash value is an account value that may accumulate within certain permanent life-insurance policies. Accessing it through withdrawals or loans may reduce the policy’s value or death benefit and could create tax consequences or cause the policy to lapse.
Certificate of Deposit
A certificate of deposit, or CD, is a deposit account that generally pays interest for keeping money with a financial institution for a specified period. Early withdrawals may result in penalties, and rates and insurance coverage depend on the issuing institution and account terms.
C
Death Benefit
A death benefit is the amount an insurance company is contractually obligated to pay to eligible beneficiaries after the insured person dies, subject to the policy’s terms and exclusions.
Diversification
Diversification means spreading money among different investments, asset types, industries or geographic regions to reduce dependence on any single investment. Diversification can help manage risk, but it cannot guarantee a profit or prevent a loss.
D
Exchange-Traded Fund
An exchange-traded fund, or ETF, pools money from multiple investors and invests in a portfolio of securities or other assets. ETF shares trade on an exchange throughout the day, and their value can rise or fall.
E
Federal Employees Health Benefits
The Federal Employees Health Benefits Program, or FEHB, provides health-insurance plan choices to eligible federal employees, retirees and qualifying family members. Eligibility, enrollment and continuation requirements vary by situation.
Financial Plan
A financial plan is a coordinated strategy for managing money and working toward personal goals. It may address cash flow, saving, investing, retirement income, insurance, taxes, estate considerations and other financial priorities.
Federal Employees Retirement System
The Federal Employees Retirement System, or FERS, is the retirement system covering most federal civilian employees hired since 1984. It generally combines a FERS Basic Benefit, Social Security and the Thrift Savings Plan.
Fixed Annuity
A fixed annuity is an insurance contract that provides a stated minimum interest rate or predetermined income payments under the contract’s terms. Guarantees depend on the financial strength and claims-paying ability of the issuing insurer.
Fiduciary
A fiduciary is a person or organization legally required, in a particular relationship, to act in another person’s best interest. The duties that apply can depend on the professional’s role, the services being provided and applicable law.
Fixed Indexed Annuity
A fixed indexed annuity is an insurance contract whose credited interest is linked in part to the performance of a market index. The owner does not invest directly in the index, and caps, participation rates, spreads, surrender charges and other provisions can limit credited interest and access to money. Guarantees depend on the financial strength and claims-paying ability of the issuing insurer.
F
High-3 Average Salary
A federal employee’s high-3 average salary is the highest average basic pay earned during any three consecutive years of creditable federal service. It is commonly used when calculating a CSRS or FERS retirement benefit.
H
Implement
Implement means completing the agreed-upon steps needed to put a financial strategy into action, including applications, transfers, account setup and other required documentation.
Investigate
Investigate means gathering information about a client’s goals, finances, priorities, concerns and existing arrangements before developing recommendations.
I
Liquidity
Liquidity describes how quickly and easily an asset can be converted to cash without a significant loss in value. Some products provide daily access, while others may impose holding periods, withdrawal limits or surrender charges.
Long-Term Care Insurance
Long-term care insurance is designed to help pay for qualifying care when a person needs assistance with certain everyday activities or experiences a covered cognitive impairment. Benefits, eligibility periods, exclusions and coverage limits vary by policy.
L
Market Volatility
Market volatility is the degree and frequency with which an investment or market rises and falls in value. Greater volatility generally means larger or more frequent price changes.
Mutual Fund
A mutual fund pools money from many investors to purchase a portfolio of stocks, bonds or other assets. Shares are generally purchased or redeemed at the fund’s net asset value calculated after the market closes.
M
Pension
A pension is an employer-sponsored retirement arrangement designed to provide eligible employees with retirement benefits. In a traditional defined-benefit pension, the benefit is usually calculated using a formula based on factors such as salary and years of service.
Premium
A premium is the amount paid to purchase or maintain an insurance policy or annuity contract. Depending on the product, premiums may be paid once, periodically or on a flexible schedule.
Permanent Life Insurance
Permanent life insurance is coverage designed to remain in force for the insured person’s lifetime when required premiums and policy conditions are satisfied. It may include a cash-value component in addition to a death benefit.
Principal
Principal is the original amount of money invested, deposited or borrowed, before accounting for interest, earnings, fees, withdrawals or market changes.
Policy Rider
A policy rider is an optional provision that changes or adds benefits, features, limitations or coverage to an insurance policy or annuity contract. Riders may involve additional costs and eligibility requirements.
Protected Growth (B)
The Protected Growth category includes financial products designed to balance growth potential with certain contractual protections. Access to money may be more limited, and guarantees depend on the product’s terms and the claims-paying ability of the issuing company.
P
Rebalancing
Rebalancing is the process of adjusting investments to bring a portfolio back toward its intended asset allocation. It may involve buying, selling or redirecting contributions and can have tax or transaction-cost consequences.
Risk Growth (C)
The Risk Growth category includes investments that accept greater market exposure in pursuit of higher potential long-term growth. Values may fluctuate, and investors can lose some or all of the principal invested.
Roth IRA
A Roth IRA is an individual retirement account funded with after-tax contributions. Contributions are not deductible, but qualified withdrawals can be made free of federal income tax when applicable requirements are satisfied.
Recommend
Recommend means presenting financial strategies or options based on the information gathered and explaining their potential benefits, risks, costs and trade-offs.
Risk Tolerance
Risk tolerance describes a person’s willingness and financial ability to accept changes in investment value, including potential losses, in pursuit of possible returns.
Required Minimum Distribution
A required minimum distribution, or RMD, is the minimum amount that generally must be withdrawn annually from certain retirement accounts after the account owner reaches the applicable starting age. Different rules can apply based on the account, employment status and whether the account was inherited.
Roth Conversion
A Roth conversion moves eligible retirement assets from a pre-tax account, such as a traditional IRA, into a Roth IRA. Untaxed converted amounts are generally included in taxable income for the year of the conversion.
R
Sequence-of-Returns Risk
Sequence-of-returns risk is the danger that significant investment losses occurring early in retirement, while withdrawals are being taken, could reduce how long a portfolio lasts—even if its long-term average return appears adequate.
Survivor Benefit
A survivor benefit is a payment or continuing benefit that may be provided to an eligible spouse, former spouse, child or another designated person after a federal employee or retiree dies. Available benefits depend on the retirement system, elections made and eligibility rules.
Social Security
Social Security is a federal program funded primarily through payroll taxes that provides eligible workers and their families with retirement, disability and survivor benefits. Benefit amounts depend on factors including a worker’s earnings record and claiming age.
Systematic Withdrawal
A systematic withdrawal is a plan for taking a specified amount or percentage from an investment or retirement account on a regular schedule. It can provide consistent cash flow, but it does not guarantee that the account will last for a particular period.
Surrender Charge
A surrender charge is a fee that may apply when an owner withdraws more than the permitted amount or ends an annuity or insurance contract during a specified surrender period.
S
Tax-Deferred
Tax-deferred means taxes on earnings are generally postponed until money is withdrawn. Tax deferral does not mean the money is tax-free, and withdrawals may be subject to income taxes and other rules.
Time Horizon
A time horizon is the amount of time available before money is expected to be needed. A longer time horizon may allow more time to recover from market declines, although investment risk still remains.
Term Life Insurance
Term life insurance provides death-benefit coverage for a specified period. It generally does not build cash value, and coverage may expire or become more expensive when the initial term ends.
Traditional IRA
A traditional IRA is an individual retirement account that may permit deductible contributions, depending on the taxpayer’s circumstances. Investment earnings generally grow tax-deferred, and taxable withdrawals are usually treated as ordinary income.
Thrift Savings Plan
The Thrift Savings Plan, or TSP, is a defined-contribution retirement savings plan for federal employees and members of the uniformed services. Participants can contribute through payroll deductions and invest among the options offered by the plan.